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Gold Price: Historical Trends

On April 5th 1933, in the midst of the greatest economic crisis in history, the government of America issued its citizens with a month’s notice to hand in all of their gold. The country’s entire gold supply was confiscated and all private ownership of the precious metal banned. It may seem like a desperate move by today’s standards, but in the years following the 1929 stock market crash, the government was desperate.

To understand gold prices today, it’s worth reviewing the historical trends of the gold price and the development of this precious commodity. What exactly do gold and gold prices have to do with economics anyway? Of all possible commodities, what is it that has people running to gold whenever there’s a crisis? It all starts with something known as the gold standard.

Gold prices and the gold standard

With the increasing rise of international trade in the 19th Century, there was a growing need to standardise exchange rates between foreign currencies. The best way of doing this, people thought, was to adopt a ‘gold standard’ – ensuring the value of a pound, franc, or dollar would be worth a defined quantity of gold. For almost a century in the US, a troy ounce of gold was worth $20.67. The values of currencies were therefore standardised, making international trade easier.

The gold standard meant that a country was only as rich as the amount of gold bullion it held, with cash and paper money simply representing a fraction of that. For 100 years, this kept inflation rates low, and government debt and deficits were tightly controlled. This worked because the value of gold was so universally trusted, that to peg something to it was to keep it secure.

But despite these perceived benefits, the gold standard effectively failed in the 1930s. These tight controls on government spending and inflation meant that economic policy couldn’t respond to the crisis caused by the Wall Street Crash. As trust in the dollar fell, people hoarded gold; the universal trusted asset – despite there being a fixed exchange rate with the dollar. Gold reserves depleted, interest rates rose, and unemployment soared.

President Roosevelt’s unprecedented move came because gold had become more valuable than law decreed it represented. Society no longer trusted that $20.67 was worth an ounce of gold, but the exchange rate was still being artificially imposed.

Recalling the gold reserves put an effective temporary halt on the gold standard. The price rose by 60 per cent to $35, devaluing the American currency and raising inflation, which began to restore trust in the value of the dollar. With the gold returned to the Federal Reserve, the government could start being flexible with interest rates. It started to encourage investment and slowly began to get the economy back on track.

The lesson that governments learned in the 1930s, is that gold is a lot more trustworthy than the pound or dollar in your pocket. When trust in the national currency begins to fail, people turn to gold, in a phenomenon referred to today as ‘safe-haven’ buying. Rule one of historical gold price trends: when economies fail, gold soars.

Gold price vs inflation

The purchasing power of the pound has declined significantly since the early 1970s. It might seem like £1 is a £1, but it was in fact worth about seven and a half times as much in 1970 as it was in 2015. Compare that to this gold price chart, which shows the opposite effect: gold prices rise and rise as time goes on. In short, gold holds its value. When the dollar, pound or euro fall in value, the price of gold increases by comparison.

Even adjusting for inflation, the raw value of gold has increased over the decades. There have been three significant hikes, and, you guessed it – they’re all during recessions.

When have gold prices been historically high?

The first spike came in the early 1930s, after the financial crisis. The value of gold shot up between 1931 and 1934.

The next big hit was seen in the 1970s when prices rose from £14.54 at the start of 1970 to £288.11 at the start of 1980. During the 1970s inflation in the UK was particulary high. Over the course of the decade, gold increased in price by almost 2,000 per cent. Even adjusted for inflation, this remains a significant boost.

For similar reasons, prices also rose significantly between 2008 and 2011. Years before the financial crisis was even on our radar as a potential outcome, in September 2001, the price of gold was £199.43. Ten years later, after banks failed, and inflation and unemployment had skyrocketed, gold was worth £1,182.82 – its highest point in recorded history. The increase in price over this decade was almost 600 per cent.

When have gold prices been historically low?

It follows that if weak economies breed high gold demand, and thus higher prices, then the opposite is true for strong economies. Gold’s lowest points come when economies are stable, and trust in currencies is high. Gold increases steadily and reliably over these periods, but not to the same extent as it does during times of economic distress.

Another look at the inflation adjusted price chart shows us that gold’s lowest price, relative to the strength of the dollar, was in 2001 – a year of unprecedented global economic growth and stability.

When should I buy gold?

The question of when to buy gold is to an extent a personal one. For many long-term gold investors, however, the general advice is to invest steadily in gold as part of a diverse portfolio.

Some people suggest investing more when the economy is strong as prices at this point are often lower, both in real terms and raw prices. The plan here is that the investment will pay off in times of economic strife should the gold price rise as per predictions.

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